Short Sale Blog

Here is the latest short sale news at Seattle Short Sales. We assist hundreds of Seattle area homeowners with short selling their home and avoiding foreclosure.

Loan Servicers' Ties to Mortgage Insurers Might be Too Close for Comfort.

Seattle Short Sales - Wednesday, December 01, 2010

Mortgage insurance is meant to protect the investor: the borrower pays the insurance premium so that if they default on the loan, the investor is protected. The loan servicer (which, in most cases, is the bank) is only an intermediary in the process. However, a recent report in American Banker indicates that some loan servicers’ position in the insurance deal is a bit too close for comfort - and quite possibly, a conflict of interest with the parties the servicer is supposed to represent. In some instances, loan servicers have force-placed insurance on their borrowers that is up to ten times as expensive as regular insurance: disadvantaging both the borrowers and the investors.

Fo the most part, banks (as loan servicers) negotiate mortgage loans with borrowers, and then they sell those loans to third parties: the investors, such as Freddie Mac or Fannie Mae. The investors pool the loans into mortgage-backed securities (MS), which are usually sold as bonds. The purchasers of the bonds earn an interest payment which is tied to the interest payment made by the borrowers on their mortgages.

Borrowers are required to have mortgage insurance, which protects the investors should the borrowers default on their loans. The loan servicers, once they have sold off the mortgage, become minor players in the deal - just intermediaries. And once they have sold those mortgages, their earnings as intermediaries are low: typically about 0.25% of the value of the mortgage. On a $200,000 mortgage, this translates to about $500 per year.

The American Banker report has uncovered many examples of close business relationships between the loan servicers and the mortgage insurers; in some cases, the insurers themselves are actually owned by the banks. The report quotes Diane Thompson, counsel for the National Consumer Law Center, as saying “There’s no arm’s-length transaction here.” She notes that this situation actually creates incentives for servicers to force-place excessive insurance coverage.

This close relationship may include outright ownership, or it may include kick-backs from insurers: payments to loan servicers. In one example given in the article, loan servicer EverBank replaced its client’s $4,000 insurance policy with a $33,000 force-placed one. They paid specialty insurer Assurant for the policy, and Assurant returned a $7,100 “commission” to EverbBank subsidiary EverInsurance - a payment far greater than EverBank would ever have received from servicing the loan.

In other instances, cases were uncovered where the banks had deliberately let an insurance policy lapse so that they could force-place a more expensive policy - stopping the advance of a delinquent borrower’s escrowed private insurance until the policy lapsed, then purchasing a more expensive policy and advancing payments on it.

These policies do not only harm borrowers - who quickly see the equity of their property stripped away as the large part of any payments they are making (or, if they are not, a growing arrears calculation) as funds go towards unreasonably high insurance policies. (American Banker uncovered one example of a $120,000 property with a force-placed insurance policy costing $10,000 per year - a policy that would soon strip away any remaining equity in the property). These policies also harm the investors, who become increasingly unlikely to recover their investment when borrowers' payments are going to insurance policies, and investment equity is rapidly being stripped.

The issue here is conflict of interest. As the American Banker report notes “there ceases to be a clear difference between the entity purchasing insurance and the entity selling it.” This works out even better for the insurer, because it means that the servicer is less likely to pursue claims (to avoid any apparent conflict of interest, and also because payments on the claims could possibly come from its own profits)) - when in fact, the servicer as representative of the investors should actually aggressively pursue any insurance claims arising from its forcibly insured portfolio.

Many banks are still reeling from the discovery of sloppy documentation practices, a discovery which leads to questions about the legalities of many past foreclosure proceedings - including accusations of “robo-signing,” as well as documentation with signing dates or locations that suggest that they may not have been signed in the presence of a notary, as required by law. These further revelations, of potentially "too close for comfort" ties between loan servicers and mortgage insurers - their lack of arms-length distance, and how their association might be to the detriment of both borrowers and investors - will only add to the mass of paperwork (and possible litigation) related to foreclosure proceedings to be expected over the coming months.

If you are a homeowner, and would like to learn more about short selling your home, please go to: http://seattleshortsales.com/homeowners/

If you are a real estate agent, and would like to learn about our no-fee short sale service, please go to: http://seattleshortsales.com/agents/

Who is a Distressed Home Consultant?

Ross Kilburn - Friday, June 13, 2008

Practically everyone. Let’s examine things:

The term “Distressed Home Consultant” went into effect in Washington State on June 12, 2008. It is part of the new “Distressed Properties Law” created during the 2008 Washington State Legislative Session and signed into law by Governor Christine Gregoire on March 30, 2008.

The purpose of the law was to protect vulnerable homeowners from being targeted by ‘equity-skimmers’ and ‘lease-option’ investors. For example, a homeowner with a substantial amount of equity, who faced difficulties in making their mortgage payments would be approached by an investor who would offer to make their mortgage payments in exchange for the deed to their house.

After a period of time, say 12 to 24 months, the homeowner would have the option of buying back their house. In reality, the homeowner would have little chance at either staying current on the rent, and face eviction or come to the end of the rental period and be in no situation to qualify for a loan and buy the house back. Either way, the investor ends up with the house and a lot of equity.

If the law focused narrowly on that issue, it would have been helpful. Unfortunately, the way it was drafted makes it even harder now for homeowners in distress to find help. Clearly a case of overreach by lawmakers who don’t fully understand the situation.

At the heart of the law is the idea of all parties to a transaction with a distressed homeowner needing to exercise ‘fiduciary responsibility’ towards the homeowner. Imagine a homeowner who has decided to sell their home. The buyer, and the buyer’s agent, under the provisions of this law, are now classified as Distressed Home Consultants. Buyer’s do not typically have to take into consideration the financial situation of the seller. They are simply making a purchase decision for their own account. This law may have the effect of scaring away buyers, when a buyer is exactly what the homeowner needs at that moment.

In addition, any real estate agent who engages with a homeowner who is in financial distress will automatically be labeled a Distressed Home Consultant.  Many agents will not want to expose themselves to the  liability  and choose to not represent these homeowners in need. Again, this law, while having good intentions, suffers from overreach, and serves to reduce the amount of qualified help for homeowners.

HUD Study Confirms Loan Fee Abuse by Brokers

Ross Kilburn - Thursday, May 29, 2008

According to a study prepared for the Department of Housing and Urban Development, the home-mortgage industry takes advantage of lower income, lesser educated borrowers to charge higher fees.

The following article is from the May 30, 2008 Wall Street Journal article by James R. Hagerty:

The study by Susan Woodward, a former chief economist for HUD, also found that loans arranged by brokers typically carried higher fees than those obtained directly from lenders.

The report, released Thursday, is based on an analysis of 7,560 fixed-rate home-purchase loans completed in May and June 2001 and insured by the Federal Housing Administration, an arm of HUD.

The study says lenders typically make better offers to borrowers in neighborhoods with higher general levels of education.

Total fees paid to the lender and broker averaged nearly $3,400 on loans with an average initial principal balance of $105,000, the report said. For brokered loans, the average fees were $4,000, compared with $3,150 for loans made directly by the lender. Those fees are a combination of upfront charges and additional funds brokers and lenders get for selling loans with relatively high interest rates.

For brokers, these additional payments are known as yield-spread premiums. Brokers often defend yield-spread premiums as a way for borrowers to reduce their upfront fees in exchange for paying a slightly higher interest rate. But the study found that the yield-spread premiums mainly benefited the brokers. For every $100 extra they paid in higher rates, the borrowers on average received only a $7 reduction in upfront fees. Banks also typically kept most of the benefit when borrowers paid above-market interest rates, the study said.

Borrowers who paid “discount points” to lower their interest rates typically didn’t benefit from a corresponding savings in their interest costs, the study said. It found that borrowers who chose “no-cost” loans — in which all fees are built into the interest rate — typically paid the lowest effective fees.

Roy DeLoach, executive vice president of the National Association of Mortgage Brokers, said that the study relies on “stale” seven-year-old data and that other studies have shown consumers save money by obtaining loans through brokers.


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